Is 2010 a Rebound Year for the Self-Storage Market? A Look at Acquisitions and Plans for the Next 'Game'

In basketball, rebounding is always an important component to winning. Rebounding also occurs in real estate, as capital markets and economic conditions vary. In 2010, self-storage is rebounding from the declines of the prior two years.

“Market activity is definitely increasing, driven by special servicers and banks divesting of problem properties,” said Steve Hrysko, vice president of the CB Richard Ellis Self-Storage Advisory Group. Indeed, an analysis of the first quarter of 2010 indicates an increase of nearly 20 percent in transaction volume over the same period last year. In addition, most observers expect market activity to increase throughout the remainder of this year.

For self-storage, rebounding may be too strong a term because of the stability of the asset class. The National Self-Storage Trends chart below shows stability in the early part of the last decade, and then a dramatic rise from 2002 through 2007. In all categories measured, including average price per square foot, total sales volume, net operating income (NOI) and cap rates, the asset class showed strong increases. Even during the recession of 2008-09, these variables declined but were relatively stable.

New Acquisitions

The increase in transaction volume suggests many players believe the market has bottomed out, and it’s a good time to strike. “Many believe now’s the time to get back into the market, before it’s too late,” said Greg Wells of the Cassidy Turley/BRE Commercial self-storage group. “A year ago, major buyers were not actively in the market. Now public and private money, and national and regional operators, are all back in the acquisition game.”

For example, Public Storage acquired a 30-property portfolio from A-American Self-Storage for close to $190 million. The deal included 28 properties in South California and two in Chicago, reportedly at a sub-8 percent cap rate on a trailing 12 months NOI. Another 54-property portfolio is on the market by A-American Self Storage, with six qualified investment groups seeking the assets. This is the first strong portfolio activity since early 2008. There’s also a 14-property portfolio being listed and another 20-plus property portfolio preparing to go to market.

New investors and veteran players have come to the self-storage asset class. Crossover investors new to the industry are descried as those invested in apartments but like the higher returns and lower loss ratios of self-storage. Veteran players include nationwide companies such as Strategic Storage Trust, W.P. Carey, the real estate investment trusts, and smaller regional companies such as Equity Based Services.

For single-asset owners or small ownership entities, concerns over refinancing in the future are driving interest in selling now. Even assets operating on a stabilized basis may be facing a capital call for more equity to refinance existing debt. Some owners are opting to cash out equity now rather than face putting more equity into a property, even if the property has strong cash flow.